Newsletters

STRS Ohio News for Active Members
October 2009

Print a copy of the August newsletter.

Print a copy of the October newsletter.

• Retirement Board Adopts Plan for Pension Design and Contribution Changes
• Two Retirement Board Seats up for Election in 2010
• Investments and Financial News Update
• Value of Defined Benefit Plans Confirmed in NIRS Report
• Watch Your Mail for New Online Password Instructions
• Fight the Flue “Bugs” With a Double Shot of Protection

 

Retirement Board Adopts Plan for Pension Design and Contribution Changes
Following many months of discussion and after receiving significant input from STRS Ohio members, the State Teachers Retirement Board unanimously approved a multifaceted plan on Sept. 1, 2009, to strengthen the financial condition of the retirement system. In approving the plan, board members cited the difficulty in making the decision, noting that these changes impact all STRS Ohio members and employers. The plan includes an increase in contributions; an increase in final average salary years; a change in eligibility for retirement; a change in the benefit formula; and a reduction in the annual cost-of-living adjustment.

Before the market downturn, STRS Ohio had a funding period of 41.2 years, exceeding state statute’s 30-year maximum funding period. Factors, such as members living longer, caused a reduction in available funds to pay off accrued liabilities over time. The unprecedented decline in the global markets and the accompanying recession, along with the projected gradual economic recovery, significantly accelerated the need for STRS Ohio to make pension benefit changes. Without these changes, STRS Ohio would eventually be unable to pay future benefits. This plan enables the Retirement Board and staff to meet their fiduciary responsibility to help ensure the long-term solvency of STRS Ohio for future generations of teachers.

STRS Ohio staff projects that these changes would save almost $9 billion in accrued liabilities and would bring the pension fund to a 33.4-year funding period from its current status of infinity, assuming the proposed timeline for the changes can be implemented. Further, the current 1% employer contribution to the health care fund continues under the proposed changes.

Increase in Contributions
— Increase member contributions by 0.5% per year beginning July 1, 2011, to a total of 2.5% on July 1, 2015.
— Increase employer contributions by 0.5% per year beginning July 1, 2016, to a total of 2.5% on July 1, 2020.

Currently, STRS Ohio members pay 10% of their salary to STRS Ohio and employers pay 14% of total teacher payroll in lieu of paying into Social Security. This plan component increases member and employer contributions by a total of 5% by July 1, 2020. The member increase would be phased in at 0.5% per year, beginning July 1, 2011, until 2.5% is reached on July 1, 2015. The employer increase would be delayed for five years, when it would be phased in at 0.5% per year, beginning July 1, 2016, until 2.5% is reached on July 1, 2020. Ultimately, STRS Ohio members would contribute 12.5% and employers would contribute 16.5%. This phased approach allows time for the economy to improve and also helps employers with budgeting.

Increase in Final Average Salary (FAS) Years
— FAS calculation to be based on five highest years of earnings, beginning Aug. 1, 2015.

Pension benefits are determined by a member’s age, years of service and FAS. Under the recommended plan, the FAS would be based on the five highest years of earnings versus the current three years, beginning Aug. 1, 2015.

Change in Eligibility for Retirement
— Increase years of service required for retirement, beginning Aug. 1, 2015.

The recommended change increases the number of years required to be eligible for retirement. Beginning Aug. 1, 2015, members can retire at any age with 35 years of service; at age 60 with 30 years of service; or at age 65 with five years of service. (Members may retire earlier with an actuarially reduced benefit at age 55 with 30 years or at age 60 with five years.) Members who meet age and service eligibility for service retirement as of July 1, 2015, will retain their eligibility under the existing rule.

Change in Benefit Formula
— New formula would be 2.2% per year for the first 30 years of service; 2.5% per year thereafter, beginning Aug. 1, 2015.

The 35-year enhanced benefit is no longer needed to encourage teachers to work longer and is eliminated. Those who have 30 years of service; who are age 55 with 25 years of service; or who are age 60 with five years of service as of July 1, 2015, receive the greater of:

(a) The benefit as of July 1, 2015, under the current formula; or

(b) The benefit upon retirement under the new formula.

In short, members who are eligible for service retirement will receive no less of a base pension benefit than they could have received on July 1, 2015. Under the new formula, at the end of a 35-year career, teachers would receive 78.5% of their final average salary; teachers who retire at age 60 with 38 years would receive 86% of final average salary.

Reduction in Cost-of-Living Adjustment (COLA)
— Beginning July 1, 2011, current retirees would receive an annual 2% COLA; members retiring after July 1, 2011, would receive a 1.5% COLA each year.

Currently, the COLA is 3%. Without a change in the COLA, a viable Defined Benefit Plan cannot be sustained.

Next Steps
In addition to STRS Ohio, the other four Ohio public pension plans have been impacted by low investment returns, demographic factors and the economic outlook. As a result, the Ohio Retirement Study Council (ORSC), which is the legislative oversight body for the five systems, directed each system to present a board-approved plan at the ORSC’s Sept. 9, 2009, meeting for either maintaining or returning to a 30-year funding period.

There was wide divergence among the plans that were presented due to the variations in each system’s funding situation, demographics and plan design. In the coming weeks, ORSC staff will work with the systems and discussions will continue at the monthly ORSC meetings. It is anticipated that eventually legislation will be drafted and introduced and then the normal legislative process will begin. All of the changes contained in STRS Ohio’s proposed plan require legislative action by the Ohio General Assembly and the governor, as all the plan components require changes in existing statutes.

Looking to the Future
The Retirement Board will continue to annually review the actuarial valuations of the pension fund and the health care fund to monitor both funds’ progress over time. The board will also continue working with its many constituents — including the Healthcare and Pension Advocates (HPA) for STRS — as discussions continue with the other Ohio systems, the ORSC and other members of the Legislature.

The STRS Ohio plan:

• Preserves the Defined Benefit Plan for Ohio’s public educators. STRS Ohio members do not have to worry about outliving their benefits. These pension benefits can continue to support local economies (more than $3.6 billion in benefits are paid to Ohio residents alone); the taxes paid on these benefits can also continue to support local, state and federal governments. A viable Defined Benefit Plan also reduces the likelihood that STRS Ohio members will have to turn to public assistance, Medicaid or social services in retirement, thus relieving taxpayers of future obligations.

• Continues to offer a retirement plan that will help Ohio’s public schools, colleges and universities recruit and retain quality educators.

• Allows for current and future active members, retirees and employers to collectively contribute to a solution.

• Provides a transition period for those teachers who are close to retirement, while recognizing that those further from retirement have more time to plan for their future financial security.

• Allows members to continue to control their retirement decisions and not be “forced” out. This mitigates a potential “stampede” of members who want to retire before changes go into effect, thus preserving retirement patterns for STRS Ohio and protecting employers from veteran teachers leaving all at once.

• Preserves all past cost-of-living adjustments (COLAs) and ad hoc increases for current retirees.

• Allows retirees’ pensions to continue to grow in the future, but at a slower rate.

Most importantly, the Retirement Board and staff, as fiduciaries of the system, have developed a plan that helps ensure the long-term solvency of STRS Ohio for future generations of teachers.

“At STRS Ohio, we know there are no easy solutions to the challenges we face — and we know some decisions will not make all members happy,” said Michael Nehf, executive director. “We pledge to continue to use our newsletters, Web site, e-mail news service and face-to-face meetings to do what we can to make sure members know the progress of the legislation and any changes going forward.”

 

Two Retirement Board Seats Up for Election in 2010
Two contributing member seats currently held by Mark Meuser and Conni Ramser are up for election in 2010. The four-year term for these State Teachers Retirement Board members ends on Aug. 31, 2010.

The election process begins this November, when individuals interested in running for one of these seats can request petitions from STRS Ohio, beginning Nov. 13, 2009. The deadline for returning petitions is Feb. 26, 2010. STRS Ohio members will receive their ballots and voting information in April; they will have through May 3 to cast their votes by mail, phone or Internet. The winners of the election will begin their four-year terms on the board on Sept. 1, 2010.

Petition forms can be obtained from STRS Ohio by calling toll-free 1-888-227-7877. Information will also be posted on the STRS Ohio Web site.

 

Investments and Financial News Update
Retirement Board Defers Payment of Reduced PBI Payments
The Performance-Based Incentive (PBI) Program enables eligible STRS Ohio investment associates to receive an additional percentage of their base salary through a PBI payment. This payment is calculated on the performance of various portfolios and asset classes against their respective benchmarks for multiple-year periods, as well as total fund performance and absolute return. STRS Ohio associates internally manage about 80% of the system’s investment assets — versus using outside money managers. Third-party studies have shown that this practice is extremely cost-effective for STRS Ohio, saving about $112 million in fees in calendar year 2008 alone. A compensation structure that includes both fixed and variable pay (pay that is “at risk”) is a commonly accepted practice in both the public and private investment sectors; STRS Ohio has had some form of incentive compensation in place since the mid–1980s.

However, the Retirement Board has made adjustments to the PBI Program throughout this past fiscal year due to the unprecedented downturn in the investment markets and after considering input from some STRS Ohio members.

Earlier this year, the Retirement Board voted to suspend the PBI Program for fiscal year 2009 as of Feb. 1, 2009. With that suspension, it was noted that any earned PBIs for that fiscal year would be limited to 7/12 of the performance results for July 1, 2008–Jan. 31, 2009. Existing program criteria also called for a 20% reduction in any earned PBIs if the total STRS Ohio investment fund did not earn a positive absolute return.

While the value of STRS Ohio’s investment fund has dropped significantly during the recession, the net value added from active management over the total fund benchmark return for the time period of July 1, 2004, through June 30, 2009, was more than $1 billion. This means that investment assets were $1 billion higher at June 30, 2009, than if STRS Ohio had invested only in index funds. This number takes into account all direct investment costs, including earned PBIs, during that period. The benchmark annualized rate of return over the five-year period was 2.30%; the return on STRS Ohio’s total investment fund was 2.69%.

At its September meeting, the board voted to not pay the resulting $3.39 million in PBIs for this multiple-year period, but instead defer their payment as well as spread the payment over future fiscal years. One-half of the payment, or about $1.7 million, will be paid only when: (1) STRS Ohio investment asses total $60 billion or higher at fiscal year-end; and (2) the total investment fund has a positive return. This latter provision is in keeping with an earlier board action that stated no PBIs would be paid in the future (beginning July 1, 2009) when the total investment fund has a negative return — regardless of the performance of individual investment associates against their respective benchmarks. The first payment of $1.7 million cannot be made before July 1, 2010. The remaining $1.7 million in PBIs can only be paid when: (1) STRS Ohio investment assets total $65 billion or more at fiscal year-end; and (2) the total fund has a positive return. This second payment cannot be made until at least July 1, 2011. As of Aug. 31, 2009, STRS Ohio’s total investment fund has a preliminary market value of $56.8 billion.

The board also approved a compensation study for investment associates. Currently, total compensation — base pay plus maximum PBI — for most STRS Ohio Investment Department associates is targeted at the bottom 25th percentile of total compensation levels in the private market. The study will include public and private sector data and will include a recommendation for the mix and amount of base pay versus variable pay for Investment Department positions.

Debate Over National Health Care Reform Is Front and Center
While Congress was not successful in meeting President Barack Obama’s desire for a vote on a health care plan before the summer recess, the topic continues to dominate discussion in Congress and in the media. While the details of reform are in flux until there is one bill, it is likely the focus will be on those who do not currently have health insurance coverage. For entities like STRS Ohio, the government will expect retirement systems to continue providing coverage to retirees. In this first round of reform, the impact for STRS Ohio will probably be at the outer edges, around long-term cost reductions in the national health care system. Over time, this could lower health care trend rates that impact STRS Ohio’s health care plan premiums. The August 2009 issue of STRS Ohio’s Legislative News includes an in-depth article about health care reform proposals and can be accessed via STRS Ohio’s Web site. Paper copies are available by calling (614) 227-2913.

Value of Defined Benefit Plans Confirmed in NIRS Report
Last fall, STRS Ohio shared information with its members about the formation of the National Institute on Retirement Security (NIRS). This organization, which STRS Ohio joined as a charter member, is using research and education programs to show how defined benefit plans enhance retirement security for their participants.

The most recent report issued by NIRS in July 2009 shows that defined benefit pension income plays a critical role in reducing the risk of poverty and hardship among older Americans. The report, titled “The Pension Factor: Assessing the Role of Defined Benefit Plans in Reducing Elder Hardships,” notes that pension income resulted in a savings of $7.3 billion in public assistance expenditures and 4.7 million fewer households in poverty or near poverty in 2006 in the United States. More than 23 million older Americans received a defined benefit pension that year. A second report by NIRS shows that 87% of all American workers believe they should have a pension so they can be self-reliant in retirement.

The value of the defined benefit plan is well understood by the State Teachers Retirement Board; preserving STRS Ohio’s Defined Benefit Plan for future generations of Ohio educators is the driving force behind the board’s proposed long-range plan (see accompanying article). About 441,000 of STRS Ohio’s members are currently enrolled in or receiving benefits from the system’s Defined Benefit Plan. However, as discussions about changes to Ohio’s public pension plans begin at the Statehouse, there may be calls for Ohio’s public employees to move to defined contribution plans controlled by outside vendors. All five systems will continue to monitor these discussions and share information with their respective members.

 

Watch Your Mail for New Online Password Instructions
The installation of STRS Ohio’s new pension management computer software is scheduled to be completed in December. Most of the system’s new features will be “behind the scenes” and will not affect members’ use of the STRS Ohio Web site. However, members who are using a password to access the Personal Account Information section of the site will need to acquire a new password. Also, to improve identity protection for our members, we will no longer use your Social Security number as your user name. Instead, members will create a user name when they log in to the updated site for the first time. All current password holders should watch their November mail for instructions on how to select a new user name and request a new password.

Fight the Flu “Bugs” With a Double Shot of Protection
As widely reported in the media, experts predict a very busy flu season with the “seasonal” influenza (flu) being joined this year by the H1N1 virus (also known as swine flu). Both forms of flu are very contagious. However, the Food and Drug Administration announced in September that a vaccine to fight the H1N1 virus will now be available in October, in addition to the vaccine for seasonal flu. Each vaccine requires a separate shot.

Seasonal Flu
The “ordinary” seasonal flu is still a concern and should not be taken lightly, although the H1N1 virus has received more media attention. A regular shot can protect you and your family from the misery of body aches, fever and cough that come with seasonal flu, which can also make existing conditions worse. The flu can occur anytime from November through May, but most often peaks in January or February.

Experts say it can take up to two weeks for protection to develop after the shot. Protection lasts up to a year. Health care providers began giving regular flu shots in September in hopes of preventing hospitalizations that on average include more than 200,000 people in the United States.

H1N1 Virus
The H1N1 virus is a new influenza virus that began causing illness in people in the United States last April. The H1N1 virus is thought to infect individuals in the same way that seasonal flu spreads. Flu viruses are spread mainly from person to person through coughing or sneezing by people with influenza, and sometimes by touching something with flu viruses on it and then touching one’s mouth or nose.

Next Steps

Learn more.

Contact your family doctor, who can help you determine what vaccinations are appropriate for you and your family members. You can also contact your local or state health department. The Centers for Disease Control and Prevention (CDC) also has an extensive amount of information on its Web site at www.cdc.gov/flu.

Take precautions to protect your health.

• Cover your nose and mouth with a tissue when you sneeze and dispose it in the trash.

• Wash your hands often with soap and water, or an alcohol-based cleanser.

• Avoid touching your eyes, nose or mouth. Germs spread this way.

• Avoid contact with sick people.

• Cough into your elbow or a tissue.

• Use a germ-killing disinfectant to clean household surfaces.

• Stay home from school or work if you become infected with the flu. The CDC recommends that you stay home for at least 24 hours after your fever is gone.

Watch for these warning signs; if they occur, seek emergency care.

• Difficulty breathing or shortness of breath.

• Pain or pressure in the chest or abdomen.

• Sudden dizziness.

• Confusion.

• Severe or persistent vomiting.

• Flu-like symptoms improve, then return with fever and worse cough.